Shares of SoundHound AI (SOUN -0.49%) fell 20.2% in September 2023, according to data from S&P Global Market Intelligence. Many investors lost some confidence in the ongoing artificial intelligence (AI) boom last month. As a small-cap company with deep roots in AI — it’s in the company name, for goodness’ sake — SoundHound took a hard hit from this increased skepticism.
The week of Sept. 17 brought news reports about Chinese AI apps threatening to flood the American market. At the same time, the Federal Reserve held interest rates firm but said it might raise rates one more time before embarking on a slower-than-expected return to lower interest rates next year. That was seen as bad news for high-risk investments, including the fast-growing but unprofitable SoundHound. Lofty interest rates on new debt can be a concrete problem for cash-poor companies in need of new financing.
So these events started a week-long price drop. At the bottom of that slope, SoundHound’s share price had fallen 36.5% in September. A bullish analyst note near the end of the month lifted SoundHound’s stock back to a milder 20.2% price drop for the full month. In that report, analyst firm DA Davidson set a price target of $5 per share, arguing that SoundHound’s AI-powered voice control tools “will set the standard for performance” in that market niche. The stock was trading at $1.75 per share when that analysis was published.
The AI fatigue in recent weeks has not been limited to SoundHound, of course. Prominent AI stocks Nvidia (NVDA 2.40%) and C3.ai (AI 2.15%) fell 11.9% and 17.7%, respectively, last month. And jangly investor nerves make sense, given SoundHound’s negative earnings and modest revenue streams — two marks of a potentially risky investment.
However, this little company is going places. SoundHound has announced four voice control deals with restaurants, food service ordering platforms, and smart-vehicle systems experts in the last two months. More will surely follow.
The business results are also moving in the right direction; SoundHound’s second-quarter sales rose 42% year over year while operating expenses declined by 28%. Furthermore, the company’s balance sheet is rock-solid with $116 million of cash equivalents and just $66 million in long-term debt balances.
So I wouldn’t recommend betting the farm on SoundHound today, but you could consider a small investment in this promising AI expert. The bottom line should firm up over the next couple of years, and I already showed you how quickly SoundHound’s revenues are rising. If the positive trends continue, a small investment could motivate you to keep a close eye on this company and perhaps build a larger position over time.
Anders Bylund has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.